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Its $3.2 billion purchase of WebEx is a major validation of the burgeoning sector.

Cisco Systems(NASDAQ:CSCO) announced yesterday that it will shell out $3.2 billion in cash for Iyar's company. As Tim Beyers told us yesterday, the deal fits well into Cisco's long-range strategy. It's also an alert to investors that on-demand software is a real growth opportunity.

"Ten years ago, on-demand was a crazy idea," Iyar told me. "It took a lot of education from us and companies like Salesforce.com(NYSE:CRM) to convince customers of the benefits. We just thought it was better than buying hardware, installing software, and then having to periodically install upgrades on the hardware. Why not just log into a website?"

It's a simple idea, but far from easy to deliver. An on-demand system requires a sophisticated foundation that supports huge transaction volumes. Every month, 3.5 million people access WebEx to hold online meetings, make sales presentations, and share documents.

Another notable achievement of on-demand is its success in reaching the small-to-medium business (SMB) market. "Many technology companies have coveted the SMB market, but have not been able to find an effective way to sell, set up, and support them," said Dan Twing of Enterprise Management Associates in a recent Fool interview. "On-demand [software] makes it easy, and the big boys are interested in reaching the SMBs this way."

It also helps that on-demand companies charge monthly or quarterly subscription fees instead of large up-front payments, an enticing feature for customers of all sizes.

Happily, investors have plenty of strong on-demand companies to choose from. At the moment, my favorites include Concur Technologies(NASDAQ:CNQR), Taleo(NASDAQ:TLEO), and RightNow Technologies(NASDAQ:RNOW). But don't assume Cisco's deal guarantees that all on-demand plays are slam dunks. The approach is still in its early stages, and some companies will crater -- that's the nature of technology.

Cisco made it clear in yesterday's conference call that its smart technologists have a core philosophy for on-demand, including a strong technology foundation, success with the SMB segment, and optimal use of the subscription model. For investors in on-demand software, this coherent strategy is insightful and encouraging. It's also telling that Cisco was willing to pay a hefty seven times 2006 revenues to jump into the on-demand market.